Page 92 - DMGT513_DERIVATIVES_AND_RISK_MANAGEMENT

Unit 7: Option Strategies and Pay-offs

(d) In protecting a net price received (cash price plus the gain or loss from the Bear Put Notes
strategy), marketers need to understand that the Bear Put Spread protects a net price
down to the strike price of the put option sold.
(e) Ordinarily, margin deposits are required for writing options. However, in the case
of the Bear Put Spread, no margin money is necessary as long as both positions are
maintained. The rationale for this is that the premium of the purchased put option
will always be higher than the premium of the sold put option premium.

(f) A Bear Put Spread is less expensive than an outright purchase of a put option.
However, there are limited gains from this strategy itself and this strategy offers
less downside price protection than the outright purchase of a put option.
5. Strips: Strips as an option trading strategy is used when the investor is expecting that
there would be big price change in the stock price as a result of which the prices would
relatively decrease more than increase, thus effecting a bearish trend. A strip is that option
combination where a long position in one call is joined with a long position in two puts,
with same exercise price (E) and date of expiration. The profit-loss pattern for strips is
depicted in Figure 7.12.

Figure 7.12: Profit/Loss at Expiration for Strips

Profit

E

Stock Price

Loss

Self Assessment

Fill in the blanks:

7. A selling option is also known as …………..an option.
8. ………….are considered very risky positions because our risk is unlimited.
9. A spread that is designed to profit if the price goes down (during the bear phase in stock
markets) is called a ………… spread.
10. A ………..spread is where the net cost of the position results in the investor receiving
money up front for the trade.

7.3 Neutral Strategies

Neutral option trading strategies denote that option combinations which are used by investors
when there is no clear, distinct direction expectation of price movements of the underlying asset

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